Key ideas presented in this blog are provided by contingent labor supply-base professional, Eric Osterhout: Sr. Specialist of Category Management, Contingent Labor for a multinational midstream energy organization.
As contingent workforce solutions continue to grow and evolve to meet organizations’ various demands, the way enterprise programs are managed and advised upon must do the same. As a part of this process, conversations around best-practices when it comes to supply base management are gaining a lot of traction—specifically rationalization versus optimization (as is evident from roundtable discussions that occurred at SIA’s CWS and Gig Economy Summit this year).
Often used as interchangeable terms, the goal of rationalization is to reduce the number of suppliers in an MSP program to cut costs, enhance efficiency, and strengthen relationships; while optimization focuses on refining the supply base to make it as efficient as possible—including cutting and adding suppliers where necessary.
So which strategy works best? People2.0 spoke exclusively with contingent labor supply-base professional, Eric Osterhout, to gain more insights into how supplier rationalization and optimization have worked for his enterprise program, and when you should utilize each one for your own contingent workforce program.
A Case Study on Supplier Rationalization and Optimization
For Osterhout specifically, the need for changes arose when the midstream energy company he manages the contingent labor supply base for was acquired by another organization—forcing them to “harmonize,” or merge, two contingent workforce programs. With more than 200 suppliers to account for, the rolling out of a new VMS and HRIS, and time-sensitive deadlines for go-live approaching, placing all of those suppliers under contract was impossible.
In this instance, Osterhout and his team decided to rationalize their supply base. They ultimately removed around 70 suppliers from the program in 90 days—terminating their supplier agreements and moving their remaining workers under the enterprise payrolling partner, or moving them to a sub-contracting agreement under an approved in-program supplier.
Once the new harmonized program went live, Osterhout moved from a rationalization mindset to an optimization one. With still too many suppliers in the programs, an overabundance of competition meant suppliers weren’t going to provide their A-list candidates because of a lower chance of success for them.
As such, Osterhout and his team are currently in the process of analyzing the quality of their current suppliers via existing metrics (quality of candidates, manager satisfaction, category of labor, etc.), and are looking to see where they still need to cut suppliers versus where they may need to add some in.
Knowing When to Rationalize vs. Optimize
As Osterhout likes to put it, a supply base is a living, breathing thing; not something that should remain static. In his own program, while they are mostly in a place where they’re optimizing their supply base, they have seen areas where they have had to go back to a rationalization mentality (i.e. having too many IT professional suppliers).
Since there’s no magic number of suppliers to make a program optimal, when should you focus on rationalizing and when should you look at optimizing?
Times to rationalize
- When there are redundancies in your supply base (e.g. too many for one labor category, geographical area, etc.)
- When you have too many suppliers to properly manage or foster healthy competition
- When you have underperforming suppliers
Times to optimize
- When there are gaps in your supply base (e.g. not enough suppliers for a certain labor category, geographical area, etc.)
- When you have underperforming suppliers
Once you have coverage for all of your labor categories and geographies, and a healthy number of suppliers in each to make it competitive, you’ll likely have the right number of suppliers for your contingent workforce program. However, it’s important to still monitor performance and constantly evaluate how the supply base as a whole is performing to meet your program’s needs.
Maintaining Supplier Relationships through Rationalizations and Optimizations
Ultimately, when it comes to managing the supply base for his program, Osterhout emphasizes the importance of looking at suppliers as partners, instead of just vendors. Although you might decide to part ways with a supplier at one point in time, that does not mean they won’t be able to serve your program’s needs in the future. Further, a supplier that is performing well now could end up needing to be rationalized out if changes within their own organization (account management, leadership, etc.) lead them to underserve your program.
At the end of the day, you want to find the best resources, in the most cost-efficient manner, deployed as quickly as possible. While you cannot have all three at the very top priority, the ability to find a balance through a well optimized and rationalized supply base—one that emphasizes the importance of relationships—can help you find success!